The economics and politics of instability, empire, and energy, with a focus on Latin America and the Caribbean, plus other random blather and my wonderful wonderful wife. And I’d like a cigar right now.

December 28, 2014

A review of the Empire Trap misses the big finding, with special attention to how Richard Nixon slapped around Peru

Negative reviews are not disheartening. People get things wrong. Interpretations differ. These are discussions worth having.

But it is disheartening when a reviewer you respect appears to have just plain missed one of the primary empirical findings of your work. I do not mean that the reviewer thinks my data is incorrect. I mean that the reviewer did not note that I provided any data at all!

But there was one place in the review where I slapped my face with my palm and started to cry, “Where, dear Lord, did I go wrong in my writing?”

Here is where I did the self-face-slapping. (It sounds better in Spanish: autobofetada.) In the 1970s, the Peruvian military government nationalized a swathe of American investments. The incoming Nixon administration put the screws in, yanking aid and making other dire threats. Regarding my account of the episode, she writes:

The military junta in control of Peru in the early seventies, for instance, nationalized a number of industries, from oil to copper to sugar. President Nixon, the State Department, and the CIA all trembled that retaliation might “lead to reprisals against other U.S. investments, alienate the Peruvian people and . . . perhaps push Peru further toward . . . relations with the Soviet bloc” (p. 372). American investors were effectively held hostage, lest the local government switch sides in the Cold War. In Peru as in countless other countries, what followed was essentially a long, drawn-out process of rescuing the hostages. Maurer calls these negotiations “imperial intervention,” though it’s hard to see how the horse-trading that achieved partial compensation for dispossessed investors was terribly different from any other bruising business transaction. Both sides sought the best deal possible — and peaceably came back to the table when they saw ways to advance their interests.

I added the italics, because one of the big empirical findings of the book was that over the entire 20th Century the United States managed to extract rather more than market value for aggrieved American investors. Seriously! That was one of the big findings. If the Red Army was not involved, then the U.S. government helped American investors beat foreign governments again and again and again, across administrations and across continents. I tried to highlight it over and over throughout the book, including the first chapter. Right here on page 2:

The Empire Trap is about the shift from politicized confrontations like the imbroglio of 1900 to legalized disputes like the more orderly affair of 2007. It advances four basic findings. First, American government intervention on behalf of U.S. foreign investors was astoundingly successful at extracting compensation through the 1980s. [Italics in the original.]

I am not bothered that someone might disagree with the finding; I am saddened that someone would miss it altogether.

Specifically, the U.S. managed to obtain full compensation in Peru. My primary evidence comes from secret communications between the expropriated companies and the American negotiators. The companies listed the minimum valuation that they would accept as compensation. These numbers were not negotiated by the Nixon Administration: the companies laid them out.

And the companies all in fact got more than those numbers! My argument largely stops there. But it is possible to check the result against market benchmarks for the two largest investments in Peru: the Cerro copper mining enterprise and the IPC oil company. (They together received 57% of the total compensation Peru paid.)

The copper company, Cerro Corporation, was publicly traded. The market value of its Peruvian investments was $58 million in 1971. One might argue that fear of the Peruvian “Revolutionary Government of the Armed Forces” had pushed down that value, but Cerro’s p/e ratio matched that of other copper producers, including those geared towards domestic American production. Cerro told the Nixon Administration that it wanted $65 million; it got $68 million. (It publicly asked for $133 million, but it would, no?)

The International Petroleum Company (IPC) was not publicly traded, but it did provide data that lets us see if it received fair compensation. It privately told the Nixon Administration that it wanted $20 million. It publicly told Peru that it wanted $85 million, a palpably ridiculous number. Now, on paper Peru made like Michael Corleone.

The Peruvian government, however, paid compensation to the U.S. government, not the companies directly. The U.S. government diverted $22 million from the settlement to IPC. In practice, then, the Peruvian government agreed to overpay other American claimants (in the knowledge that the funds would be diverted to IPC) in order to be able to pretend that it paid nothing for the oilfields and refineries.

Was $22 million a fair amount? Yes. Over the previous decade, IPC earned around $1.9 million per year at a time when U.S. oil companies traded at p/e ratios rather below five. Unless you believe that an investment in a country ruled by the Revolutionary Government of the Armed Forces was less than half as risky as an investment in a country ruled by Richard Nixon, then IPC got more than twice a market price.

(Hmm. Richard Nixon? Another day, another day.)

I am fine with saying that I am wrong in calling Nixon’s strong-arming of the Peruvians “imperialism.” I am also fine with saying that others have argued that covert intervention was not used to defend American investments ... although I believe that such a conclusion is incorrect, I am also well-aware that I may be placing too much weight upon a few internal communications and President Nixon’s taped offhand comments. And if you show me how, I am fine with saying that my numbers are wrong!

But please acknowledge that I brought some numbers to the table! (And not just for Peru; for every single expropriation of American natural-resource FDI from the 1890s through the 1980s.) Those numbers may well be wrong. But they took several years to gather! So even if the numbers are wrong, please acknowledge that the numbers are there? Or at least somebody tell me how my writing went so off the rails that a great historian could miss that I presented data to back my claims.

If you want to know more, a working paper about the Peruvian episode can be found here.